Freddie Mac - Federal Home Loan Mortgage Corp - FHLMC
Federal Home Loan Mortgage Corporation, a.k.a., Freddie Mac.
Freddie Mac is a group created by Congress whose job it is to buy mortgages, bundle them together, and sell them as investments. That's: Freddie Mac: Federal Housing Loan Mortgage Corporation. Remember it twice.
The org provides liquidity, affordability and stability in the housing market. Both Freddie Mac and Fannie Mae buy mortgages from lenders. They package and pool them, and sell them to investors. This magic happens via these government organizations providing money at reasonable interest rates to banks, savings and loans, and other mortgage distributors...who, in turn, lend that money to Joe the Plumber, buying his relatively inexpensive home.
Freddie Mac was created during the Nixon administration to make the buying of mortgages more liquid...especially for the little guy: the small-mortgage, first-time-home-buying public. A big driver was the notion that owning your own home was a huge part of the American dream, and that anyone and everyone who was willing to work hard and generally do the dance with khaki pants should, in fact, be able to afford to own their own, uh...semi-malfunctioning septic tank.
They also package a bunch of mortgages and sell them into the secondary mortgage market. Lenders can then have further liquidity and make more loans, stimulating the economy on many levels. Additionally, these organizations guarantee the timely payment of interest and principal, thus de-risking the loan from an investor perspective, and having the resulting outcome, usually, of cheaper interest rates.
Freddie’s partner in this dance was Fannie: Fannie Mae, a.k.a. the Federal National Mortgage Association. Freddie leads in buying mortgages on the secondary market, puts them all in an easily digestible investment vehicle, and then resells them. The goal of both Freddie and Fannie is to stabilize and expand the broader housing market...especially at the lower end. The key difference, economically, between the two is the supplier of debt, or rather, from whom they buy. Freddie buys from myriad smaller institutions, whereas Fannie buys from large commercial banks.
How does that work?
Like this: Freddie knocks on the door of the Bank of America mortgage loan department in their big national clearance center. He sifts through thousands of mortgages that fit one set of criteria or another, a certain loan size…a certain duration to maturity…a certain risk level…even geographic exposure.
Freddie then creates a financial product in which investors can…invest, which is like 7 billion dollars worth of mortgages. Maybe they have an average size of 100 grand…so, in total, there are about 10,000 of these small mortgages in one bucket; if all of them pay fully to maturity or as expected, they will deliver to investors a return of say, 6.234%. And everyone knows that there will be some defaults in these mortgages, some deadbeats who need lawyers to come after them to pay their bills...some who have calamitous family situations that just don’t let them have the dough to pay, and sadly they will be escorted out of their homes by the sheriff, etc.
It’s all part of the mortgage dance, and Freddie’s job is to aggregate those loans and then resell them to investors who want to just write one big fat check...not 10,000 of them. Because, uh...it’s very difficult to do the dance when you’re holding that many checks.